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Oversight panel grills Treasury on bailout plan

December 11th, 2008 9:43 AM by Lehel Szucs

Oversight panel grills Treasury on bailout planA House panel reviewing the government's $700-billion rescue of the financial sector questions how the money is being spent and whether it's being used to halt rising foreclosures.Reporting from Washington -- A congressional panel reviewing the government's $700-billion rescue of the financial sector questioned how the money was being spent and whether it was helping homeowners avoid foreclosure.

In a report made public Wednesday, the Congressional Oversight Panel for Economic Stabilization questioned whether the Treasury Department's shifting remedies constituted a strategic response to the crisis.It was the latest critical assessment of the Troubled Asset Relief Program, the massive federal intervention into the nation's financial system.

The public needs to know more about what Treasury thinks is behind the economy's problems and how it's trying to fix them, the report said.

The report comes as Democrats, including President-elect Barack Obama, insist that instead of simply injecting money into banks, the government must use the funds to halt rising foreclosures. Federal Reserve Chairman Ben S. Bernanke has predicted that foreclosures this year will reach about 2.25 million.

"In the macroeconomic sense, foreclosure reduction is an essential part of getting us out of the problem we're in," Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said Wednesday. "The refusal so far to use the money to that purpose has been, I think, a violation of the intent and undermines the ability to get the votes in this Congress to do things in the future."

Frank made his comment as he opened a hearing on the bailout.

The 37-page oversight report offers no specific conclusions, but the questions suggest sharp disagreements with Treasury Secretary Henry M. Paulson's stewardship of the program and echo some of the criticism raised in a Government Accountability Office audit of the program last week.

Gene Dodaro, acting comptroller general of the U.S., told lawmakers Wednesday that the GAO concluded that the government must toughen its monitoring of the bailout fund to ensure that banking institutions limit their top executives' pay and comply with other restrictions. The auditors said the Treasury Department had no mechanism to track how institutions were using taxpayer money that the government injected into the banking system.

The tough reviews also come as the Bush administration is considering whether to seek access to the second half of the $700-billion fund. All but $15 billion of the first $350 billion has been allocated in the two months the program has been in place.

Neel Kashkari, director of the Treasury office that oversees the bailout program, told lawmakers at the hearing that Paulson had made no determination about whether to request tapping the remaining money. He said the Treasury Department was keeping Obama's economic team abreast of developments.

Kashkari defended the work of the program in the face of tough questions from lawmakers. "The system is fundamentally more stable than it was when Congress passed the legislation," he said.

Pressed by Rep. Maxine Waters (D-Los Angeles) to put more resources into reducing foreclosures, Kashkari said: "Imagine how many foreclosures we would have if we had allowed the financial system to collapse."

First $350 billion of bailout fund almost goneJust $15 billion is left. Most of the funds have gone to banks. Paulson may ask for more.Reporting from Washington -- The government has just $15 billion left to spend from the first $350-billion pot of financial bailout money, the Treasury Department announced Monday.

The department said $335 billion has been allocated from the first half of the $700-billion program, which was enacted Oct. 3. The accounting was contained in a report to Congress.Treasury Secretary Henry M. Paulson, who is overseeing the program, is considering tapping the second $350 billion. The main goal of the program is to get financial institutions lending more freely, which would help revive the economy.

Of the $335 billion spoken for, $250 billion has been pledged for capital infusions to banks. In return, the government receives partial ownership stakes in the institutions.

An additional $40 billion was provided to help bail out insurance giant American International Group, and $25 billion was part of a rescue package for Citigroup Inc. Of that piece, $20 billion was in the form of a capital infusion to the New York-based bank and $5 billion was to offset potential losses as part of the government's guarantee of certain risky assets held by Citigroup.

Also, $20 billion was provided to the Federal Reserve for credit protection as part of a new program to boost the availability of consumer loans.

On Capitol Hill, lawmakers have blasted Paulson for his handling of the $700-billion package, complaining that his shifts in strategy sent confusing signals to the public and Wall Street, and hurt confidence in the government's ability to deal with the crisis.

Paulson has defended his management, including his decision to officially abandon the original rescue strategy: buying delinquent mortgages and other bad debt from banks to free up their balance sheets and spur lending.

"Although financial conditions remain far from normal and many challenges remain, greater confidence in financial markets and financial institutions will contribute importantly to the recovery process," the report said.

Even as the government prods banks to step up lending, it is crucial that they act responsibly, a Fed official said.

"We want banks to be willing to deploy capital and liquidity, but they must do so in a responsible way that avoids past mistakes and does not create new ones," Donald Kohn, vice chairman of the Federal Reserve, said in a speech.

Lax lending standards figured prominently into people getting home loans that they couldn't afford during the housing boom. When the housing market went bust, foreclosures surged and mortgage-related investments soured, leading to much broader financial and economic troubles.

Neel Kashkari, who heads the Treasury Department's Office of Financial Stability, on Monday said, "Lending won't materialize as fast as any of us would like." Echoing Kohn, he said financial institutions "must not repeat the poor lending practices that were the root cause of today's problems."

Federal auditors last week called for tougher monitoring of the $700-billion bailout program to ensure that banks limit their top executives' pay and comply with other restrictions.